SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998 Commission File No. 0-5392
FIRST COMMONWEALTH CORPORATION
(Exact Name of Registrant as specified in its Charter)
5250 South Sixth Street
P.O. Box 5147
Springfield, IL 62705
Address of principal executive offices, including zip code
Virginia 54-0832816
(State or other jurisdiction (IRS Employer
Incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Shares outstanding at July 31, 1998:
54,555
Common stock, par value $1 per share
<PAGE>FIRST COMMONWEALTH CORPORATION
(The "Company")
TABLE OF CONTENTS
Part I: Financial Information 3
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the six
months and three months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information 16
Item 5. Other information 16
Item 6. Exhibits 16
Signatures 17
2
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
ASSETS 1998 1997
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $182,281,827 and $184,782,568)$ 177,837,509$ 180,649,040
Investments held for sale:
Fixed maturities, at market
(cost $1,581,670 and $1,672,298) 1,580,941 1,668,630
Equity securities, at market
(cost $3,184,357 and $3,184,357) 2,405,955 3,001,744
Mortgage loans on real estate
at amortized cost 9,670,902 9,469,444
Investment real estate, at cost, net
of accumulated depreciation 9,358,892 9,760,732
Real estate acquired in
satisfaction of debt 1,794,544 1,724,544
Policy loans 14,314,416 14,207,189
Short-term investments 300,000 1,773,531
Other invested assets 66,212 0
217,329,371 222,254,854
Cash and cash equivalents 22,532,159 15,704,573
Investment in parent 350,000 350,000
Accrued investment income 3,544,330 3,630,773
Reinsurance receivables:
Future policy benefits 37,353,943 37,814,106
Policy claims and other benefits 3,663,810 3,529,078
Other accounts and notes receivable 840,066 840,066
Cost of insurance acquired 18,108,087 18,654,506
Deferred policy acquisition costs 15,854,134 16,745,720
Costs in excess of net assets purchased,
net of accumulated amortization 8,958,639 9,180,471
Property and equipment, net of
accumulated depreciation 2,999,264 3,152,182
Other assets 738,915 715,862
Total assets $ 332,272,718$ 332,572,191
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 255,478,405$ 253,964,709
Policy claims and benefits payable 1,422,766 2,080,907
Other policyholder funds 2,374,883 2,445,469
Dividend and endowment accumulations 15,090,590 14,679,816
Income taxes payable:
Current 18,200 10,555
Deferred 3,014,614 3,365,692
Notes payable 17,983,351 18,241,602
Indebtedness to affiliates, net 63,815 27,150
Other liabilities 2,980,106 2,914,991
Total liabilities 298,426,730 297,730,891
Minority interests in
consolidated subsidiaries 1,660,788 1,634,877
Shareholders' equity:
Common stock - $1 par value per share.
Authorized 62,500
shares - 54,555 and 54,555
shares issued
after deducting
treasury shares of 930 and 930 54,555 54,555
Additional paid-in capital 51,877,304 51,877,304
Unrealized depreciation of
investments held for sale (781,272) (198,630)
Accumulated deficit (18,965,387) (18,526,806)
Total shareholders' equity 32,185,200 33,206,423
Total liabilities and
shareholders' equity $ 332,272,718$ 332,572,191
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Revenues:
<S> <C> <C> <C> <C>
Premiums and policy fees $ 8,182,157 $ 8,886,198 $16,650,503$ 17,958,594
Reinsurance premiums
and policy fees (1,071,078) (1,077,416) (2,307,943) (2,223,426)
Net investment income 3,796,112 3,839,187 7,527,849 7,698,804
Realized investment
gains and (losses), net (494,652) (22,436) (405,231) (27,364)
Other income 23,157 62,038 42,043 63,791
10,435,696 11,687,571 21,507,221 23,470,399
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 6,153,999 6,474,044 12,586,590 13,365,823
Reinsurance benefits
and claims (507,559) (533,072) (1,097,433) (966,248)
Annuity 364,192 395,099 742,734 751,353
Dividends to policyholders 909,260 1,024,504 1,925,204 2,152,006
Commissions and
amortization of deferred
policy acquisition costs 847,558 690,913 2,174,235 2,057,323
Amortization of cost
of insurance acquired 255,334 304,627 546,419 548,946
Operating expenses 2,192,484 2,747,749 4,572,826 5,304,405
Interest expense 395,346 400,290 791,986 805,605
10,610,614 11,504,154 22,242,561 24,019,213
Income (loss) before
income taxes and
minority interest (174,918) 183,417 (735,340) (548,814)
Credit (provision) for
income taxes 101,532 (352,740) 332,878 160,985
Minority interest in gain
of consolidated subsidiaries (42,046) (32,952) (36,119) (7,721)
Net loss $ (115,432)$ (202,275)$ (438,581)$ (395,550)
Basic loss per share from
continuing operations
and net loss $ (2.12)$ (3.71)$ (8.04)$ (7.25)
Diluted loss per share
from operations)
and net loss $ (2.12)$ (3.71)$ (8.04)$ (7.25)
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (438,581)$ (395,550)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities net of changes
in assets and liabilities
resulting from the sales and
purchases of subsidiaries:
Amortization/accretion of fixed maturities 293,517 309,261
Realized investment (gains) losses, net 405,231 27,364
Policy acquisition costs deferred (89,000) (825,000)
Amortization of deferred
policy acquisition costs 980,586 1,122,318
Amortization of cost of insurance acquired 546,419 548,946
Amortization of costs in excess of net
assets purchased 221,832 221,832
Depreciation 303,808 212,431
Minority interest 36,119 7,721
Change in accrued investment income 86,443 (87,913)
Change in reinsurance receivables 325,431 881,288
Change in policy liabilities and accruals 1,436,287 (514,544)
Charges for mortality and administration of
universal life and annuity products (5,548,543) (4,736,072)
Interest credited to account balances 3,003,308 3,679,554
Change in income taxes payable (343,433) 221,029
Change in indebtedness
(to) from affiliates, net 36,665 (65,156)
Change in other assets and
liabilities, net (211,487) (1,413,069)
Net cash provided by (used in)
operating activities 1,044,602 (805,560)
Cash flows from investing activities:
Proceeds from investments
sold and matured:
Fixed maturities held for sale 83,928 140,000
Fixed maturities sold 0 0
Fixed maturities matured 19,429,686 3,492,302
Equity securities 0 42,801
Mortgage loans 469,613 834,769
Real estate 827,765 234,073
Policy loans 1,631,118 2,441,970
Short-term 1,473,531 100,000
Total proceeds from investments
sold and matured 23,915,641 7,285,915
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (16,991,445) (8,262,020)
Equity securities 0 (710,388)
Mortgage loans (1,082,415) 0
Real estate (480,567) (466,770)
Policy loans (1,738,345) (2,099,120)
Other invested assets (66,212) 0
Short-term 0 (100,000)
Total cost of investments acquired (20,358,984)(11,638,298)
Purchase of property and equipment (78,364) (347,340)
Net cash provided by (used in)
investing activities 3,478,293 (4,699,723)
Cash flows from financing activities:
Policyholder contract deposits 8,025,990 9,997,553
Policyholder contract withdrawals (5,721,299) (7,568,374)
Payment for fractional shares
from reverse stock split 0 (533,992)
Proceeds from issuance of notes payable 0 204,267
Payments of principal on notes payable (258,251) (962,519)
Net cash provided by financing activities 2,304,691 1,136,935
Net increase (decrease) in
cash and cash equivalents 6,827,586 (4,368,348)
Cash and cash equivalents at
beginning of period 15,704,573 16,801,288
Cash and cash equivalents
at end of period $ 22,532,159 $12,432,940
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
FIRST COMMONWEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
First Commonwealth Corporation ("FCC") and its consolidated subsidiaries
(the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the Company believes the disclosures are
adequate to make the information presented not be misleading, it is
suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto presented in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31,
1997.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary
for a fair presentation of the results of operations for the periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the year or of the
Company's future financial condition.
At June 30, 1998, the parent, significant subsidiaries and affiliates of
First Commonwealth Corporation were as depicted on the following
organizational chart.
ORGANIZATIONAL CHART
AS OF JUNE 30, 1998
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 41% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79% of First Commonwealth Corporation
("FCC") and 100% of Roosevelt Equity Corporation ("REC"). FCC owns 100% of
Universal Guaranty Life Insurance Company ("UG"). UG owns 100% of United
Security Assurance Company ("USA"). USA owns 84% of Appalachian Life
Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln Insurance
Company ("ABE").
6
<PAGE>
2. INVESTMENTS
As of June 30, 1998, fixed maturities and fixed maturities held for sale
represented 82% of total invested assets. As prescribed by the various
state insurance department statutes and regulations the insurance
companies' investment portfolio is required to be invested primarily in
investment grade securities to provide ample protection for policyholders.
The Company does not invest in so-called "junk bonds" or derivative
investments. The liabilities of the insurance companies are predominantly
long-term in nature and therefore, the companies invest primarily in long-
term fixed maturity investments. The Company has analyzed its fixed
maturity portfolio and reclassified those securities expected to be sold
prior to maturity as investments held for sale. The investments held for
sale are carried at market value. Management has the intent and ability to
hold its fixed maturity portfolio to maturity and as such carries these
securities at amortized cost. As of June 30, 1998, the carrying value of
fixed maturity securities in default as to principal or interest was
immaterial in the context of consolidated assets or shareholder's equity.
3. NOTES PAYABLE
At June 30, 1998, the Company had $17,983,351 in long term debt
outstanding. The debt is comprised of the following components:
1998
Senior debt $ 6,900,000
Subordinated 10 yr. notes 4,648,524
Subordinated 20 yr. notes 4,034,827
Other notes payable 2,400,000
$ 17,983,351
A. SENIOR DEBT
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The debt bears interest at a rate equal to
the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate." The base rate at June 30, 1998 was 8.5%. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of each year,
with a final payment due May 8, 2005. On November 8, 1997, the Company
prepaid the May 1998 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP practices)
shall not be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service. The Company is in compliance with all
of the covenants of the agreement.
B. SUBORDINATED DEBT
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes provide for
principal payments equal to 1/20th of the principal balance due with each
interest installment beginning December 16, 1997, with a final payment due
June 16, 2002. The 20-year notes bear interest at the rate of 8.5% per
annum, interest payable semi-annually, with a lump sum principal payment
due June 16, 2012. The Company refinanced a total of $504,962 of
subordinated 10-year notes to subordinated 20-year notes bearing interest
at the rate of 8.75% per annum. The terms, other than interest rate, of
the refinanced notes are the same as the original subordinated 20 year
notes.
7
<PAGE>
C. OTHER NOTES PAYABLE
FCC has outstanding promissory notes payable to United Income, Inc. ("UII")
and United Trust, Inc. ("UTI") of $700,000 and $300,000, respectively.
These notes bear interest at the rate of 1% above the variable per annum
rate of interest most recently published by the Wall Street Journal as the
prime rate. Interest is payable quarterly with principal due at maturity
on May 8, 2006. In February 1996, FCC borrowed an additional $150,000 from
UII and $250,000 from UTI to provide additional cash for liquidity. The
note bears interest at the rate of 1% over prime as published in the Wall
Street Journal, with interest payments due quarterly and principal due upon
maturity of the note on June 1, 1999.
In November 1997 FCC borrowed $1,000,000 from UTI to facilitate the
prepayment of the May 1998 principal payment due on the senior debt. . The
note bears interest at the rate of 1% over prime as published in the Wall
Street Journal, with interest payments due quarterly and principal due upon
maturity of the note on November 8, 2006.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1998 $ 258,251
1999 1,916,504
2000 1,516,504
2001 1,516,504
2002 3,840,758
4. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Those mandatory assessments may be partially recovered
through reduction in future premium taxes in some states. The Company does
not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
5. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $795,140 and $815,042 in interest expense
through the second quarter of 1998 and 1997, respectively. The Company
paid $10,555 and $60,044 in federal income tax through the second quarter
of 1998 and 1997, respectively.
During the second quarter of 1998, the Company foreclosed on three mortgage
loans, transferring a total value of $70,000 to real estate acquired in
satisfaction of debt.
8
<PAGE>
6. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations as presented on the income statement.
<TABLE>
For the YTD period ended June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $ (438,581) 54,555 $ (8.04)
EFFECT OF DILUTIVE SECURITIES
None
DILUTED EPS
Income available to
common shareholders $
and assumed conversions (438,581) 54,555 $ (8.04)
</TABLE>
<TABLE>
For the second quarter ended June 30,
1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $ (115,432) 54,555 $ (2.12)
EFFECT OF DILUTIVE
SECURITIES
None
DILUTED EPS
Income available to
common shareholders $ $
and assumed conversions (115,432) 54,555 (2.12)
</TABLE>
<TABLE>
For the YTD period ended June 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $ (395,550) 54,555 $ (7.25)
EFFECT OF DILUTIVE
SECURITIES
None
DILUTED EPS
Income available to
common shareholders $
and assumed conversions (395,550) 54,555 $ (7.25)
</TABLE>
9
<PAGE>
<TABLE>
For the second quarter ended June 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $ (202,275) 54,555 $ (3.71)
EFFECT OF DILUTIVE
SECURITIES
None
DILUTED EPS
Income available to
common shareholders $
and assumed conversions (202,275) 54,555 $ (3.71)
</TABLE>
For the periods shown above there were no convertible securities or options
in FCC.
7. PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur before the end of 1998.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur prior to the end of 1998. The proposed merger is not
contingent upon the pending change in control of UTI.
8. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Under the terms of the FSF
Agreement, FSF will buy 473,523 authorized but unissued shares of UTI
common stock for $15.00 a share and will also buy 389,715 shares of UTI
common stock that UTI purchased during the last year in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. FSF will also purchase 66,667 shares of
UTI common stock and $2,560,000 of face amount convertible bonds which are
due and payable on any change in control of UTI, in private transactions,
primarily from officers of UTI. In addition, FSF will be granted a three
year option to purchase up to 1,450,000 shares of UTI common stock for
$15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is expected to be completed during the third quarter 1998.
There can be no assurance that the transaction will be completed. The
pending change in control of UTI is not contingent upon the merger of UTI
and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this section is to discuss and analyze the Company's
consolidated results of operations, financial condition and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes. The Company reports
financial results on a consolidated basis. The consolidated financial
statements include the accounts of FCC and its subsidiaries at June 30,
1998.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
RESULTS OF OPERATIONS
(A) REVENUES
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 9% when comparing the six and three months ended June 30,
1998 to the same periods in 1997. The Company currently writes little new
traditional business, consequently, traditional premiums will decrease as
the amount of traditional business in-force decreases. Collected premiums
on universal life and interest sensitive products is not reflected in
premiums and policy revenues because Generally Accepted Accounting
Procedures ("GAAP") requires that premiums collected on these types of
products be treated as deposit liabilities rather than revenue. Unless the
Company acquires a block of in-force business or marketing changes its
focus to traditional business, premium revenue will continue to decline.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two different
parties. During September of 1996, it was announced that control of UTI
would pass to an unrelated party, but the change in control did not
materialize. At this writing, a contract is pending with a different
unrelated party for the change in control of UTI. Please refer to the
Notes to the Consolidated Financial Statements for additional information.
The possible changes and resulting uncertainties have hurt the insurance
companies' ability to recruit and maintain sales agents.
Net investment income decreased 2% and 1% when comparing the six and three
months ended June 30, 1998 to the same period one year-ago, respectively.
The decrease in net investment income is due to the decrease in invested
assets. The decrease in invested assets and the increase in cash and cash
equivalents is a short-term fluctuation as management positions the Company
for the pending change in control of UTI.
The overall investment yields for 1998 and 1997, are 7.3% and 7%,
respectively. The Company's investments are generally managed to match
related insurance and policyholder liabilities. The comparison of
investment return with insurance or investment product crediting rates
establishes an interest spread. The minimum interest spread between earned
11
<PAGE>
and credited rates is 1% on the "Century 2000" universal life insurance
product, which currently is the Company's primary sales product. The
Company monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted interest
spreads. It is expected that monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on the insurance policies the Company currently has in
force and will write in the future.
The Company had net realized investment losses of $405,231 and $27,364 for
the six months ended June 30, 1998 and 1997, respectively. The Company
had net realized investment losses of $494,652 and $22,436 for the three
months end June 30, 1998 and 1997, respectively. The current period
investment losses can be attributed to the foreclosure of three mortgage
loans, which represents 69% of realized investment losses. At this
writing, the three foreclosed properties are under contract for sale at
book values.
(B) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 7% and 5%
for the six and three months ended June 30, 1998 as compared to the same
periods one year-ago, respectively. The decrease in life benefits net of
reinsurance is due to the decrease in premium revenues that resulted in
lower benefit reserve increases. In addition, policyholder benefits
decreased due to a decrease in death benefit claims of $1,329,000 and
$722,000 for the six and three months ended June 30, 1998 compared to the
same periods one year-ago, respectively. There is no single event that
caused death benefits to decrease. Death claims vary from year to year and
therefore, fluctuations in death benefits are to be expected and are not
considered unusual by management.
Operating expenses decreased 14% and 20% for the six and three months ended
June 30, 1998 as compared to the same periods one year-ago, respectively.
The decrease in operating expenses is due to the decrease in salaries. The
decrease in salaries is due to a 10% reduction in staff compared to the
previous year, including the retirement of an executive officer.
Interest expense decreased 2% and 1% for the six and three months ended
June 30, 1998 as compared to the same periods one year-ago, respectively.
Since December 31, 1998, notes payable decreased approximately $258,000.
In March 1997, the base interest rate for most of the notes payable
increased a quarter of a point and has remained at 8.5%. The base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank. Please refer to Note 3 "Notes Payable"
in the Notes to the Consolidated Financial Statements for more information.
(C) NET LOSS
The net loss for the current periods compared to the previous year is
directly related to the realized investment losses. The Company did
experience improvement in the relationship between operating expenses and
premium revenues. The ratios for the six months ended June 30, 1998 and
1997 are 27% and 30%, respectively. The ratios for the three months ended
June 30, 1998 and 1997 are 27% and 31%.
FINANCIAL CONDITION
The financial condition of the Company has changed very little since
December 31,1997. Total shareholder's equity decreased 3% as of June 30,
1998 compared to December 31, 1997.
Investments represent approximately 65% and 67% of total assets at June 30,
1998 and December 31, 1997, respectively. Accordingly, investments are the
largest asset group of the Company. The Company's insurance subsidiaries
are regulated by insurance statutes and regulations as to the type of
investments that they are permitted to make and the amount of funds that
may be used for any one type of investment. In light of these statutes and
regulations, and the Company's business and investment strategy, the
Company generally seeks to invest in United States government and
government agency securities and corporate securities rated investment
grade by established nationally recognized rating organizations.
12
<PAGE>
The liabilities are predominantly long-term in nature and therefore, the
Company invests in long-term fixed maturity investments that are reported
in the financial statements at their amortized cost. The Company has the
ability and intent to hold these investments to maturity; consequently, the
Company does not expect to realize any significant loss from these
investments. The Company does not own any derivative investments or "junk
bonds". As of June 30, 1998, the carrying value of fixed maturity
securities in default as to principal or interest was immaterial in the
context of consolidated assets or shareholders' equity. The Company has
identified securities it may sell and classified them as "investments held
for sale". Investments held for sale are carried at market, with changes
in market value charged directly to shareholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
The Company has three principal needs for cash - the insurance companies'
contractual obligations to policyholders, the payment of operating expenses
and the servicing of its long-term debt. Cash and cash equivalents as a
percentage of total assets were 7% at June 30, 1998, and 5% at December 31,
1997. Fixed maturities as a percentage of total invested assets were 82%
at June 30, 1998 and December 31, 1997.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity
investments such as bonds and mortgage loans which provide sufficient
return to cover these obligations. The Company has the ability and intent
to hold these investments to maturity; consequently, the Company's
investment in long-term fixed maturities are reported in the financial
statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to
cover the Company's unamortized deferred policy acquisition costs with
respect to the policy being surrendered.
Cash provided by (used in) operating activities was $1,044,602 and
$(805,560) for the six months ended June 30, 1998 and 1997, respectively.
The net cash provided by operating activities plus net policyholder
contract deposits after the payment of policyholder withdrawals equaled
$3,349,293 and $1,623,619 for the six months ended June 30, 1998 and 1997,
respectively. Management utilizes this measurement of cash flows as an
indicator of the performance of the Company's insurance operations, since
reporting regulations require cash inflows and outflows from universal life
insurance products to be shown as financing activities when reporting on
cash flows.
Cash provided by (used in) investing activities was $3,478,293 and
($4,699,723), for the six months ended June 30, 1998 and 1997,
respectively. The most significant aspect of cash provided by (used in)
investing activities are the fixed maturity transactions. The increase in
fixed maturities matured is due to the timing of the investment strategy,
which started six years ago. The strategy was investing funds into fixed
maturity investments with three to seven year maturities. Over the past
several years the difference between a seven year maturity investment yield
compared to a longer period investment yield was inconsequential. The
Company has not directed its investable funds to so-called "junk bonds" or
derivative investments.
Net cash provided by financing activities was $2,304,691 and $1,136,935 for
1998 and 1997, respectively. Policyholder contract deposits decreased 20%
in 1998 compared to 1997. Policyholder contract withdrawals has decreased
24% in 1998 compared to 1997. The change in policyholder contract
withdrawals is not attributable to any one significant event. Factors that
influence policyholder contract withdrawals are fluctuation of interest
rates, competition and other economic factors.
At June 30, 1998, the Company had a total of $17,983,351 in long-term debt
outstanding. Long-term debt principal reductions are approximately $1.5
million per year over the next several years. The senior debt is through
First of America Bank - NA and is subject to a credit agreement. The debt
bears interest to a rate equal to the "base rate" plus nine-sixteenths of
one percent. The Base rate is defined as the floating daily, variable rate
of interest determined and announced by First of America Bank from time to
time as its "base lending rate". The base rate at issuance of the loan was
8.25%, and has remained unchanged through March 1, 1997, when it increased
to 8.5%. Interest is paid quarterly and principal payments of $1,000,000
are due in May of each year beginning in 1997, with a final payment due May
8, 2005. On November 8, 1997, the Company prepaid the $1,000,000 May
8,1998, principal payment.
13
<PAGE>
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of the now dissolved Commonwealth Industries Corporation,
(CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes, except for
one $840,000 note, provide for principal payments equal to 1/20th of the
principal balance due with each interest installment beginning December 16,
1997, with a final payment due June 16, 2002. The aforementioned $840,000
note provides for a lump sum principal payment due June 16, 2002.
Principal reductions of $516,500 per year are required on the
aforementioned notes.
As of June 30, 1998 the Company has a total $26,819,055 of cash and cash
equivalents, short-term investments and investments held for sale in
comparison to $17,983,351 of notes payable. FCC services this debt through
existing cash balances and management fees received from the insurance
subsidiaries. FCC is further able to service this debt through dividends
it may receive from its wholly owned life insurance subsidiary Universal
Guaranty Life Insurance Company (UG).
Since FCC is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its subsidiaries.
On a parent only basis, FCC's cash flow is dependent on revenues from
management and cost sharing arrangements with its subsidiaries and its
earnings received on invested assets and cash balances. At June 30, 1998,
substantially all of the consolidated shareholders equity represents net
assets of its subsidiaries. Cash requirements of FCC primarily relate to
servicing its long-term debt. The Company's insurance subsidiaries have
maintained adequate statutory capital and surplus and have not used surplus
relief or financial reinsurance, which have come under scrutiny by many
state insurance departments. The payment of cash dividends to shareholders
is not legally restricted. However, insurance company dividend payments
are regulated by the state insurance department where the company is
domiciled.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, the
Company does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material adverse
impact on the Company. The Company is not aware of any material pending or
threatened regulatory action with respect to the Company or any of its
subsidiaries. The Company does not believe that any insurance guaranty
fund assessments will be materially different from amounts already provided
for in the financial statements.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing was
completed at the end of the first quarter of 1998. Periodic regression
testing will be performed to monitor continuing compliance. By addressing
14
<PAGE>
year 2000 compliance in a timely manner, compliance will be achieved using
existing staff and without significant impact on the Company operationally
or financially.
PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Under the terms of the FSF
Agreement, FSF will buy 473,523 authorized but unissued shares of UTI
common stock for $15.00 a share and will also buy 389,715 shares of UTI
common stock that UTI purchased during the last year in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. FSF will also purchase 66,667 shares of
UTI common stock and $2,560,000 of face amount convertible bonds which are
due and payable on any change in control of UTI, in private transactions,
primarily from officers of UTI. In addition, FSF will be granted a three
year option to purchase up to 1,450,000 shares of UTI common stock for
$15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is expected to be completed during the third quarter 1998.
There can be no assurance that the transaction will be completed. The
pending change in control of UTI is not contingent upon the merger of UTI
and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend
to the shareholders a merger of the two companies. Under the Plan of
Merger, UTI would be the surviving entity with UTI issuing one share of its
stock for each share held by UII shareholders.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and
UII owns 47% of United Trust Group, Inc. Neither UTI nor UII have any
other significant holdings or business dealings. The Board of Directors of
each company thus concluded a merger of the two companies would be in the
best interests of the shareholders. The merger will result in certain cost
savings, primarily related to costs associated with maintaining a
corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur before the end of 1998.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur prior to the end of 1998. The proposed merger is not
contingent upon the pending change in control of UTI.
PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On April 30, 1998, UTI and First Southern Funding, a Kentucky corporation
("FSF"), signed a Definitive Agreement ("the FSF Agreement") whereby FSF
will make an equity investment in UTI. Under the terms of the FSF
Agreement, FSF will buy 473,523 authorized but unissued shares of UTI
common stock for $15.00 a share and will also buy 389,715 shares of UTI
common stock that UTI purchased during the last year in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. FSF will also purchase 66,667 shares of
UTI common stock and $2,560,000 of face amount convertible bonds which are
due and payable on any change in control of UTI, in private transactions,
primarily from officers of UTI. In addition, FSF will be granted a three
year option to purchase up to 1,450,000 shares of UTI common stock for
$15.00 per share.
Management of UTI intends to use the equity that is being contributed to
expand their operations through the acquisition of other life insurance
companies. The transaction is subject to the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is expected to be completed during the third quarter 1998.
There can be no assurance that the transaction will be completed. The
pending change in control of UTI is not contingent upon the merger of UTI
and UII.
FSF is an affiliate of First Southern Bancorp, Inc., a bank holding company
that owns five banks that operate out of 14 locations in central Kentucky.
ITEM 6. EXHIBITS
The Company hereby incorporates by reference the exhibits as reflected in
the Index to Exhibits of the Company's Form 10-K for the year ended
December 31, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMONWEALTH CORPORATION
(Registrant)
Date: August 10, 1998 By /s/ James E. Melville
James E. Melville
President, Chief Operating Officer
and Director
Date: August 10, 1998 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President and Chief
Financial Officer
17
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<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<DEBT-HELD-FOR-SALE> 1,580,941 1,668,630
<DEBT-CARRYING-VALUE> 177,837,509 180,649,040
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<MORTGAGE> 9,670,902 9,469,444
<REAL-ESTATE> 11,153,436 11,485,276
<TOTAL-INVEST> 217,329,371 222,254,854
<CASH> 22,532,159 15,704,573
<RECOVER-REINSURE> 41,017,753 41,343,184
<DEFERRED-ACQUISITION> 33,962,221 35,400,226
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<INVESTMENT-INCOME> 7,527,849 7,698,804
<INVESTMENT-GAINS> (405,231) (27,364)
<OTHER-INCOME> 42,043 63,791
<BENEFITS> 14,157,095 15,302,934
<UNDERWRITING-AMORTIZATION> 2,720,654 2,606,269
<UNDERWRITING-OTHER> 5,364,812 6,110,010
<INCOME-PRETAX> (735,340) (548,814)
<INCOME-TAX> 332,878 160,985
<INCOME-CONTINUING> (438,581) (395,550)
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